Why did the Bank introduce a new family of Banknotes in August 2009?

High and, in particular, volatile inflation disrupts economic development and reduces long-term growth. It also reduces welfare, especially for poorer people who are more vulnerable to the negative effects of rising prices. Inflation is essentially a monetary phenomenon that is best controlled through appropriate monetary policy, which in Botswana, as elsewhere, is the responsibility of the central bank. (See also basics of monetary policy.)

Does the Bank target inflation?

No. The Bank sets a quantitative objective range for inflation in the medium term that guides its monetary policy decisions. However, this does not meet all the elements of inflation targeting. These typically include a more explicit framework and price stability mandate to ensure clarity and accountability. In addition, the central bank must have full operational independence, including giving precedence to the inflation target over other objectives such as a target for the exchange rate. While these conditions are not fully met at present in Botswana, it is judged that the current framework remains appropriate given the prevailing circumstances. (See also basics of monetary policy and monetary policy framework.)

What input does the Bank make to exchange rate policy?

The Bank implements the exchange rate policy and must be consulted on any proposed changes in the policy. However, the policy is determined by His Excellency, the President of Botswana on the basis of recommendations made by the Minister of Finance and Development planning. (See also Exchange rate policy.)

Is the Bank not concerned about the high cost and low quality of banking services in Botswana? If so, should it not impose direct controls on the banks to reduce charges?

Public complaints about the standard and cost of banking services have persisted over many years, and are a matter of great concern to the Bank. As a result, the Bank is in regular dialogue with the commercial banks over the need to continually improve service delivery to customers. The Bank has authority under the Bank of Botswana Act (section 41) to determine the level of service fees and commissions charged by banks. However, the preferred approach is to encourage effective competition among the banks, including through encouraging new banks to enter the market, provided they satisfy licensing requirements. This approach has met with significant success as banks have introduced a range to new products and rationalised fee structures. Consumers are also encouraged to compare bank products and charges and change banks if they are dissatisfied. However, it also should be recognised that financial stability depends in large part on banks remaining profitable and, for this, they must be able to charge realistic fees for their services. (See also financial institutions and consumer protection.)

What is the purpose of holding foreign exchange reserves, and why does Botswana hold such high reserves relative to the size of the economy?

The reserves enable the country to meet its obligations to make payments in foreign exchange and prevent disruptive volatility in the exchange rate. This is particularly important for a country like Botswana. As a small economy, heavily dependent on the export of a narrow range of resources, it is vulnerable to economic shocks. This was clearly seen in late 2008 and early 2009 when diamond exports virtually ceased due to the global economic slowdown; however, with the reserves as a cushion, imports to the country could continue without interruption. This vulnerability necessitates a higher level of reserves being maintained than would be the case in a more diversified economy. The reserves are also in large part the counterpart of savings by the Government, providing a cushion for gradual adjustment to sharp fluctuations in government revenue and/or expenditure. In addition, the foreign reserves largely arose from sales of diamonds. Since these are non-renewable, it makes sense to treat the proceeds as long term investment that should be invested for the benefit of both current and future generations. (See also foreign reserves.)